Bryant, in the matter of Gunns Limited (in liq) (receivers and managers appointed) v Badenoch Integrated Logging Pty Ltd

The parties to the proceeding were Gunns Limited (in liquidation) and Badenoch Integrated Logging Pty Ltd. The dispute involved whether certain payments made by Gunns to Badenoch constituted unfair preferences under the Corporations Act 2001 (Cth). The Federal Court of Australia was tasked with resolving this matter. The central legal issues before the court were whether the payments were unfair preferences, whether there was a continuing business relationship between the parties, whether the peak indebtedness rule applied, whether Badenoch had a good faith defence, and whether Badenoch could claim a set-off against any sum it was ordered to pay. The court had to interpret sections 588FA, 588FG(2), and 553C of the Corporations Act 2001 (Cth) to address these issues.

The court determined that the payments in question were indeed unfair preferences under s 588FA(1) of the Corporations Act 2001 (Cth) because there was a break in the continuing business relationship during the relation back period. The court held that the peak indebtedness rule applied, making all the payments subject to scrutiny. The court found that Badenoch had not established a good faith defence under s 588FG(2) because it failed to prove that it had reasonable grounds to believe and did believe that Gunns was able to pay its debts as they fell due. Lastly, the court did not need to decide whether set-off was available in unfair preference claims because the defendant had notice of Gunns’ insolvency.

The court ordered that the parties provide draft orders to give effect to the judgment within 14 days. The decision provides clarity on the application of the unfair preference provisions and the peak indebtedness rule in the context of a continuing business relationship.